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End of Calendar Year: Transfer Pricing, Changing Duty Rates and Other Customs Considerations

16 December 2014

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End of Calendar Year: Transfer Pricing, Changing Duty Rates and Other Customs Considerations

2015 promises to be a big year from an Australian customs perspective. However, before turning to the events of 2015, the end of 2014 brings issues of changing duty rates, transfer pricing adjustments and developments in our existing free trade agreements that need to be considered. Below we set out 5 issues brokers, importers and exporters should consider now, prior to contemplating the challenges of 2015.

Transfer pricing adjustments

Many Japanese, Chinese, German and other European corporations have financial years that end on 31 December. The Australian subsidiaries of these companies are likely to have the same financial year end.

Financial year end often brings about transfer pricing adjustments, which may be reflected in a post importation increase or decrease to the invoice price of goods. Transfer pricing adjustments raise the following customs issues:

Can the transfer price of the goods be accepted as the customs value? (Customs has expressly stated that transfer pricing and customs valuation methodologies are different)

Does the adjustment impact the price of goods, and if so, does it change the duty payable?

Could the transfer pricing adjustment be the catalyst to move from invoice based customs valuation to a more favourable cost-plus or re-sale minus approach?

Do you need to make voluntary disclosure of the adjustment and/or seek a transfer pricing valuation advice?

The most important action is to discuss transfer pricing with your customs team (preferably before any adjustment is made). The best customs teams review whether the transfer pricing adjustment can be characterised in a way that produces a customs neutral result, or go one step further and use the adjustment as the basis to review what is the best overall approach to customs valuation.

Reduction in the duty rates for clothing

The duty rate for clothing will fall from 10% to 5% on 1 January 2015. This is a change in the general rate so there will be no need to claim a preference to enjoy the lower rate. However, the falling rate does bring some important considerations:

Are there any expected late December arrivals the clearance of which can be delayed until after 1 January?

The Developing Country and ASEAN FTA rate for clothing will, after 1 January 2015, be the same as the general rate – will this influence your client’s procurement decisions?

Have there been any customs duty driven decisions or supply chain structures that make less sense when the duty rate is reduced to 5%? If so, these decisions and structures should be reviewed in light of the new duty rates.

Free trade agreements

With all the excitement over the China FTA, it’s easy to forget that there are already a number of FTAs between Australia and other countries already in place. Under our existing FTAs rates will continue to fall each calendar year. For example, in 2015:

Clothing under the US FTA will fall from 8% to 0%

Plastics under the ASEAN FTA will fall from 5% to 0%

A number of items under the Korean FTA (only in place since 12 December 2014) will reach year 2 of the reduction schedule.

Imports from countries with falling tariff rates on 1 January 2015 should be monitored to identify potential late December arrivals. Where such goods are identified, an assessment should be made regarding the merits of delaying entry of the goods (with the resulting duty saving) compared to the costs of warehousing the goods until 1 January 2015.

The reducing duty rates are also a timely reminder that decisions not to utilise FTAs should be reviewed annually. Falling duty rates under FTAs means that the costs of not utilising those FTAs increase.

Food exporters – US food registration renewal

Exporters of food to the US are required to be registered with the US Food and Drug Administration. Renewal of that registration is required by 31 December 2014. Failure to renew could result in US prosecution and the holding of goods at the US border.

Illegal logging due diligence requirements

On 1 December new due diligence requirements regarding the importation of almost all timber, wooden furniture and paper products commenced. Importers must now declare whether they have undertaken due diligence to identify the risk that the import was derived from illegally logged timber.

The new requirements are onerous and will be the subject of a Government review so far as they affect small business. The Government report into the measures is due in March 2015. We encourage businesses impacted by the new requirements to contact us regarding the lodgement of a submission.

While the outcome of the Government review may bring some relief for small business, there are a number of steps that importers should be taking now to ensure compliance.